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Calculating The Fair Value Of HNI Corporation (HNI)

I am going to run you through how I calculated the intrinsic value of HNI Corporation (NYSE:HNI) using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in November 2017 so be sure check the latest calculation for HNI here.

Crunching the numbers

We are going to use a two-stage DCF model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To start off, I took the analyst consensus forecast of HNI’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 9.25%. This resulted in a present value of 5-year cash flow of $266M. Want to understand how I arrived at this number? Take a look at our detailed analysis here.

The graph above shows how HNI’s top and bottom lines are expected to move going forward, which should give you an idea of HNI’s outlook. Then, I calculate the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is $1,246M.

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $1,513M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $34.84, which, compared to the current share price of $33.65, we see that HNI is about right, perhaps slightly undervalued at a 3.40% discount to what it is available for right now.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.

For HNI, I’ve compiled three pertinent aspects you should look at:

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.